Cross price elasticity of demand

Question 1

What does cross price elasticity of demand measure?

Answer 1

It measures how responsive the quantity demanded of one good is to changes in the price of another good

Question 2

What does the sign ( positive or negative) tell you about the good?

Answer 2

Tells you whether the product is a substitute good or a complementary good

Question 3

What does the size of the answer tell you?

Answer 3

Tells you how cross price elastic demand for one good is in relation to the changes in price of another good

Question 4

Will two goods that are substitutes have a positive or negative cross elasticity?

Answer 4

Positive cross price elasticity

Question 5

Give an example of the impact that an increase in the price of one good has on demand for its substitute good?

Answer 5

The demand for the substitute good will increase
Eg - An increase in the price of one good ( eg gas ) will lead to an increase in the demand for the substitute ( eg electricity )

Question 6

Will two goods that are complements have a positive or negative cross price elasticity?

Answer 6

A negative cross price elasticity

Question 7

If the price of cinema tickets rise, what will happen to the demand for popcorn? (complementary goods example)

Answer 7

It will fall

Question 8

What is the cross price elasticity of unrelated goods?

Answer 8

Zero

Question 9

What are the uses of cross price elasticity?

Answer 9

• Helps classify goods as substitute goods or complementary
• Helps determine the pricing policy
• Complementary goods, the business can anticipate the impact of changing the price of one good on the demand for another good

Question 10

Give three limitations of cross price elasticity of demand?

Answer 10

Values are based on estimates
Forecasting changes in demand is very difficult
information used to calculate XED may become outdated